Tesla Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 18, 2023

There are 11 speakers on the call.

Operator

Good afternoon, everyone, and welcome to Tesla's Q3 2023 Q and A Webcast. My name is Martin Viecha, VP of Investor Relations, and I'm joined today by Elon Musk, Haybab Taneja and a number of other executives. Our Q3 results were announced at about 3 pm Central Time in the update that we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today.

Operator

Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our mostly recent filings with the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. But before we jump into the Q and A, Elon has some opening remarks. Elon?

Speaker 1

Thank you, Martin. So just the Q3 recap. Our last quarter was impacted by downtime for global factory upgrades that will help us reduce cost per vehicle as well as increased production. We remain focused on 3 main objectives, which is the cost reduction of our products, investments in artificial intelligence and other growth projects like optimists and continued free cash flow generation. Regarding vehicle cost, Our team was able to reduce the cost per vehicle further in Q3, despite headwinds from factory idle cost and ramp up of new factories.

Speaker 1

And we believe there's still meaningful room for improvement there. Regarding Autopilot and AI, Our vehicle is now driven over half a 1000000000 miles with FSD beta, full self driving beta, and that number is growing rapidly. We recently completed a 10,000 GPU cluster of H100s. We think probably bring it into operation faster than anyone's ever brought that much compute per unit time into production Since training is the fundamental limiting factor on progress with full self driving and vehicle autonomy. We're also seeing significant promise with FSD version 12.

Speaker 1

This is the end to end AI where it's photon count in controls out. Really you can think of it as there's just a Large bitstream coming in and a tiny bitstream going out, compressing reality It's a very small set of outputs, which is actually kind of how humans work. The vast majority Human data input is optics from our eyes. And so we are Like the car, photons and controls out with neural nets, just neural nets in the middle. It's very interesting to think about that.

Speaker 1

We will continue to invest significantly in AI development As this is really the mass game changer, and I mean success in this regard in the long term, I think has the potential to make Tesla the most valuable company in the world by far. If you have fully autonomous cars at scale and fully autonomous, humanoid robots that are truly useful, It's not clear what the limit is. Regarding energy storage, we deployed 4 gigawatt hours of energy of storage products in Q3. And as this business The energy vision is becoming our highest margin business. Energy and service now contribute over $500,000,000 to quarterly profit.

Speaker 1

The Cybertruck and a lot of people are excited about the Cybertruck. I am too. I've driven the car. It's an amazing product. I do want to emphasize that there will be enormous challenges in reaching volume production with the Cybertruck.

Speaker 1

And then in making a cyber truck cash flow positive. This is this is simply normal for When you've got a product with a lot of new technology or any new vehicle, brand new vehicle program, but especially one that is As different and advanced as the Cybertruck, you will have problems proportionate to How many new things you're trying to solve at scale. So I just want to emphasize that while I think this is Potentially our best product ever. And I think it is our best product ever. It is going to be Require immense work to reach volume production and be cash flow positive at a price that people can afford.

Speaker 1

Often people do not understand what is truly hard. That's why I say prototypes are easy. Production is hard. People think it's the idea or you make a prototype, you design a car. And as soon as the designing car It is such as anyone can do it.

Speaker 1

It does require taste. It does require effort to design a prototype. But The difficulty going from a prototype to volume production is like 10000% harder to get to volume production than to make the prototype in the 1st place. And then it is even harder than that to reach positive cash flow. That is why there have not been new car startups that have been successful for 100 years, apart from Tesla.

Speaker 1

I just want to temper expectations for Cybertruck. It's a great product, but financially, it will take, I don't know, a year to 18 months before it is a significant positive cash flow contributor. I wish there was some way That's to be different, but that's my best guess. So it's really the demand is off the trust. We have over A million people who have reserved the car.

Speaker 1

So it's not a demand issue, but we have to make it. And we need to make it at a price that people can afford. Insanely difficult things. In conclusion, We continue to focus on ramping production while maintaining positive cash flow. And we continue to target, expect to have around 1,800,000 vehicle deliveries, as stated earlier this year.

Speaker 1

The Tesla AI team is, I think, one of the world's best and I think it is actually by far the world's best when it comes to real world AI. I'll say that again. Tesla has the best real world AI team on earth, period. And it's getting better. And lastly, I wanted to thank all of our employees who are making a lot of extra effort during uncertain times.

Speaker 1

Thank you very much for your hard work and the impact that you're making.

Operator

Thank you very much, Elon. And our CFO, Wybaf, have some opening remarks as well.

Speaker 2

Thanks, Martin. Vehicle deliveries in Q3 outpaced production and we had yet another record quarter of profitability in our energy business. Congratulations to the Tesla team for their continued focus on operational excellence as we navigate through a period of economic uncertainty, Higher interest rates and shifting consumer sentiment. As Elon mentioned, our Q3 operational and financial performance was impacted by Plan downturns for our factory upgrades. This was necessary to allow for further factory improvements and production rate increases.

Speaker 2

Despite such factory shutdowns, our cost per vehicle decreased to approximately 37,500. We saw sequential decreases in material costs and freight. Reducing the cost of our vehicles is our top right. On the operating expenses front, R and D expenses continue to rise Due to cyber truck prototype builds and pilot production testing, combined with spend on AI technologies like full self driving, Optimus and Dojo. We have and will continue to make investments in these areas and hence our capital expenditure and R and D will continue to grow in the near term.

Speaker 2

However, our focus is to continue making investments through positive cash flow from operations. This year itself, we have generated Operating cash flows of approximately $8,900,000,000 and free cash flows of approximately $2,300,000,000 Our other businesses are becoming more prominent on a standalone basis with energy business leading the charge primarily from the growth in megapipe deployments. Our services and other businesses on a year on year basis also continue to show positive momentum as we benefit from our growing fleet. As regards our pricing strategy, in addition to what we have shared before, I want to elaborate that most car buying happens with 1 or other form of financing. Hence, we also view pricing in terms of monthly costs for the customer.

Speaker 2

And therefore, as interest costs in the US have risen substantially, It has required us to adjust the price of our vehicles to keep the monthly cost in parity. We've tried to offset such adjustments While I focus on reducing costs, there is an inherent lag in cost reductions, which in turn impacts margins. To that extent, we recently announced a partner vehicle leasing program in the US whereby you can get a standard day Model Y for as low as $3.99 a month. In conclusion, as we navigate through a challenging economic environment, We're focused on reducing costs, maximizing delivery volumes and continuing making investments in the future, in particular, AI and other Next Generation Platform. We believe this strategy positions us well for the long term.

Speaker 2

Once again, I would like to Thank the Tesla team for their efforts in the last 4.

Operator

Thank you very much. And now let's go to investor questions. The first investor question comes from Craig. How many Cybertruck deliveries do you anticipate for 2024?

Speaker 1

It's difficult to make an accurate Yes, at this point, going back to what I said earlier, that the ramp is going to be extremely difficult. And like I said, there's no way around that. If you try to make If we just try to do some copycat, vehicle design, of which there are literally 200 models that are Slight variations on a theme in the combustion engine world. Just distinctions without a difference. Then it's really not that hard.

Speaker 1

But if you want to do something radical and innovative and something really Special like the type of like the Cybertruck. It is extremely difficult because there's nothing to copy. You have to invent not just The car, but the way to make the car. So the more uncharted the territory, the less predictable The outcome. Now I can say that if you say, well, where will things end up?

Speaker 1

I think we'll end up with Roughly a quarter 1000000 cyber trucks a year. And, but I don't think we're going to reach that output rate next year. I think we'll probably reach it sometime in 2025.

Operator

That's my best guess. Thank you. The second question is, can you provide a progress update on the 4,680 cell, particularly progress towards performance improvements and cost savings outlined on Battery Day.

Speaker 3

Thank you. Sure thing, Martin. 4680 cell production in Texas increased 40% quarter over quarter. Congrats to the Texas team for producing their 20,000,000 cell off of line 1. Texas is now our primary 4,680 facility.

Speaker 3

We're heavily focused on quality. Scrap is down 40% quarter over quarter. With the increased volume and yield improvements, cell costs consistently improved month over month within the quarter, although we have a lot more work to do to achieve our steady state goals. And that is our priority. The Cybertruck cell with 10% higher energy than our Model Y cell started production on Line 2 in Texas.

Speaker 3

This quarter we convert to building 100% Cybertruck cells to simplify and focus the factory as we ramp all four lines in phase 1 over the next three quarters. Phase 2 of the Texas 4,680 facility is currently under construction. The additional four lines incorporate further capital efficiencies over phase 1, And our target is for them to start producing in late 2024. Lastly, in Cato, we're retooling to enable large scale pilot runs of our next generation cell designs. Cato's long term goal is to be the launch pad for new cells, 1 generation ahead of our mass production facilities, enabling faster iteration and smoother ramp ups of new designs.

Operator

Thank you. The next question from institutional investors, could you please provide an update on capacity expansion plans for companies, factories in Berlin and Austin and the opening schedule of Gigafactory Mexico.

Speaker 4

Berlin and Austin factory, the current priority is actually maximize the output from our existing lines by laser focus on Efficiency Improvement. As always, maintaining a high quality and reducing per unit cost will be as critical as growing the production volume. From Mexico. We're working on infrastructure and factory design in parallel with the engineering development of the new production that we will be manufacturing there. That's all I can share for now.

Speaker 1

In Mexico, we're laying the groundwork to begin construction and doing all the long lead items. But I think we want to just get a sense for What the global economy is like before we go full tilt on the Mexico factory. I am worried about the high interest rate environment That we're in. It's I just can't emphasize this enough that, for the vast majority of people buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.

Speaker 1

So That's if interest rates remain high or if they go even higher, it's that much harder to For people to buy the car, they simply cannot afford it. So, and we are tracking, I believe, at this point for Model Y to be the For selling car on earth, but not just in revenue, but in unit volume. If you compare that to the other vehicles that are Number 2 and number 3 and whatnot, they cost much less than our car. So We're just hitting low of large numbers situations here. I know people want us to advertise and we are advertising.

Speaker 1

I think there is some Just let me there is something to be gained on the advertising front. I don't think it's nothing. But Employing people of a car that is great, but they cannot afford doesn't really help. So that is really the thing that must be sold is to make the car portable The average person can't afford it for any amount of money. They can't afford it.

Speaker 1

They can't afford it. So This is a big deal.

Operator

Okay. Thank you very much. The next question is, when do you expect Model 3 Highland to be available in the U. S? I just wanted to address that Unfortunately, we don't answer product related questions and timings on earnings calls.

Operator

So let's go to the next one. Current sell side consensus assumes that Tesla will deliver 2,300,000 vehicles in 2024, representing 28% growth versus 2023 guidance. Is this growth rate achievable without any mass market launches in 2024? And when does Tesla expect to return to its 50% long term CAGR?

Speaker 2

Thanks for the question. When you look at 2024, there are a lot of moving pieces. Elon just talked about what is happening in the macroeconomic environment. So we're focused on growing our volumes in a very cost efficient manner And I carefully reviewing all our options and we'll be able to provide a much more meaningful update at our next earnings call.

Speaker 1

Yeah. I mean, the risk of stating the obvious, it's not possible to have a compound growth rate of 50% forever or you will exceed the mass of the known universe. So I think we will grow very rapidly and much faster than any other car company on earth by far.

Operator

Thank you. Next question is, do you have an approximate timeline in mind for the robotaxi driven or non driven? What excites you most about how this project is progressing?

Speaker 1

Well, the rubber tax is Like necessarily non

Speaker 2

driven.

Speaker 1

I guess I'm very excited about our progress with autonomy. The End to end, nothing but Nets. Self driving software is amazing. It drives me all around Austin with no interventions. So Yes, this is clearly the right move.

Speaker 1

Yes. So it's really, really pretty amazing. And obviously, that same Software and approach will enable optimists to do useful things and And they've locked us to learn how to do things simply by looking. So extremely exciting in the long term. As I mentioned before, given that the economic output is Number of people times productivity.

Speaker 1

If you no longer have a constraint on people, effectively, you've got a humanoid robot that Can do as much as you'd like. Your economy is, why is the infinite? Infinite for all So I don't think anyone is going to do it better than Tesla, not by a long shot. Bus Dynamics is impressive, but their robot lacks a brain, sort of like the And then, you also need to be able to design the humanoid robot in such a way that it can be mass manufactured. And then at some point, the robots will manufacture the robots.

Speaker 1

Now obviously we need to make sure that there's a good place for humans in that future, We're going to create some variant of the Terminator outcome. So we're going to put a lot of effort into localized control of the humanoid robot. So basically anyone will be able to shut it off locally. And you can't change that, Even if you put like a software update, you can't change that. It has to be hardcoded.

Operator

Thank you. The next question is, why was the price dropped on FSD if it is getting better and robotaxi is expected So

Speaker 1

soon. Well, we just wanted to make it more affordable. So, Marvin will try it. I think over time, the Price of FSD will increase proportionate to its value. So I would regard the current price as a kind of a temporary

Operator

low. Thank you. The next question is again on FSD. Mercedes is accepting legal liability for when it's Level 3 autonomous driving system Drive Pilot is active. Is Tesla planning to accept legal liability for FSD?

Operator

And if so, when?

Speaker 1

Well, there's a lot of people that assume we have legal liability judging by the lawsuits. We're certainly not being let that off the hook on that front, whether we like we'd like to or wouldn't like to.

Speaker 5

I mean, I think it's important to remember for everyone that Mercedes' system is limited to Key roads in Nevada and some certain cities in California doesn't work in the snow or the fog. It must have a lead car marked planes only 40 miles per hour. Our system is meant to be holistic and driving any conditions. So we obviously have a much more capable approach, but with those kind of limitations, Really not very useful.

Speaker 1

I think some people understand the profundity of the Tesla AI System, very, very few. It's basically baby AGI. It has to understand reality in order to drive AB AGI.

Operator

Thank you. The next question on Optimus, will Optimus be working on Gigafactory lines next year? If so, how many would you guess will be deployed.

Speaker 1

I think at this point, we are not ready to discuss details of the Optimus program, but we will make Provide periodic updates online. So as you can see, we're, you know, optimists a year ago Could barely walk. And now I can do yoga. So A few years from now, I can probably do ballet.

Operator

Sounds good. And the last question from investors is, neural net path planning represent a significant advance in capability and safety for FSD. What steps is Tesla taking to make this technology available outside the U. S?

Speaker 1

Yeah. Our approach has been to try to get it like the more places we try to make it work, the harder the problem is. So the reason we don't do it in all countries Simultaneously is that it would take much longer to make it work anywhere at all. So That's why it's currently just North America. And also for most parts of the world, you have to get approval before deploying things.

Speaker 1

Whereas in the U. S, you can deploy things at risk or at least take liability for you to play. So, it's whereas most countries require some sort of extensive approval program. So we only want to go through that extensive approval program when we think it's kind of Ready for prime time in that country. I apologize that it's not not in those countries, but we keep Finding ways to make it better.

Speaker 1

And it really needs to drive such that it exceeds the even unsupervised, significantly exceeds the probability of injury of a human. Significantly better, a lower probability of injury than a human by far. I think we're tracking to that point very quickly. Obviously, in the past, I've been overly optimistic about this. The reason I've been overly optimistic is that the progress tends to sort of look like a log curve, which is that you have Kind of rapid initial improvements that if you were to extrapolate that rapid Fairly linear rate of improvement.

Speaker 1

You get to self driving I quickly, but then the rate of improvement curves over logarithmically, has lost the asymptote. That's not happened several times. I would characterize our progress in real world AI as a series of stacked log curves. I think that is also true in other parts of AI like LLMs and whatnot, series of stacked log curves. Each log curve gets higher than the last one.

Speaker 1

So if you keep stacking them, keep stacking logs eventually your to FST.

Operator

Thank you. Let's now go to analyst questions. The first question comes from Will Stein from Truist. Will, please go ahead and unmute yourself.

Speaker 6

Great. Thanks so much for taking my question and thanks for all the updates today. We learned earlier on the call, it sounds like, you don't think the truck will ramp to Significant volume until its 3rd year of production. Should we have a similar anticipation for The ramp of the NextGen platform or is there any reason that we should be maybe more optimistic or pessimistic about the Wilder. Thank

Speaker 1

you. Yeah. I mean, to be clear, it's not really the 3rd year of production. It's kind of like the 18th month of production is roughly my guess. So it's just that they happen just it'll happen is that the It starts this year, spans next year and gets to 2025.

Speaker 1

So technically there are 3 calendar years in there, but there's actually only 18 months, not 3 years. I would be very disappointed if it took us and that would be shocking if it took us 3 years. But 18 months from initial deliveries to reach volume and reach prosperity with an immense I can't tell you how much blood, sweat and tears level required to achieve that is Just staggering. I've been through it many times. And then here we go again.

Speaker 1

You know,

Speaker 6

similar path for the NextGen platform.

Speaker 3

I mean, there's like unique complexity to cyber.

Speaker 1

Yeah. I mean, cyber truck is Yes. I mean, we dug our own grave with cyber side of trucks. Nobody in general, nobody digs great better than And so it is You know, CyberTrack is one of those special products that comes along only once in a long while. And special products that come along once in a long while are just incredibly difficult to Bring to market to reach volume to be prosperous.

Speaker 1

It's fundamental to the nature of the newness. So now the sort of high volume, low cost, Smaller vehicle is actually much more conventional.

Speaker 5

Yes, in terms of like technologies we're putting into it, we didn't have to invent how to bend full hard stainless steel or have mega 9,000 ton castings or Largest hot stamping in the world or new high voltage, low voltage architectures. It's learning from everything we've done. So We hope it will run faster than the technology. Yes, we did. There's significantly less parts.

Speaker 5

Yes, you're only as the slowest part. If you have less of those, that means you could probably be faster.

Speaker 1

Yes, exactly.

Speaker 5

I mean, that said, it's sold. So pretty revolutionary now we're going to

Speaker 1

build it. It is. Yes, it's Their manufacturing approach for the high volume small vehicle is revolutionary. The Delek revolution is quite in the same way as the Cybertruck. I think it will be quite a fast ramp.

Speaker 1

So as well as you're saying, we're doing everything possible to simplify that vehicle in order to achieve a Units per minute level that is unheard of in the auto industry.

Speaker 3

Yes. I mean, simplification makes it easier to automate. It also makes it lower cost. Yes. That's intrinsically lower cost.

Speaker 1

Yes. Just to be clear, is It will be cool, but it's utilitarian. It's not meant to be fill you with Owen, magic. It's it can get you from A to B. It will be so beautiful, but It's utilitarian.

Speaker 1

It's a utility. That's not 14 inches of travel on the suspension. Yeah. As an

Speaker 3

example. Yes.

Operator

All right. Thank you very much. Let's go to Pierre Ferragu from New Street Research.

Speaker 7

Hey, can you hear me fine? Yes? Yes. Hey, I have a first, like a follow-up question on the FSD and Pricing and Adoption. So I agree with you that as FSD improves, we should see its value Increasing, but I guess like the ultimate values of FSD, which is to be able to handle like A robotaxi is not going to necessarily interest everybody, and you have a bit of a degraded version that would be like a chauffeur service where the car drives by itself, but you still have to be in the car and around.

Speaker 7

And then there is like the hands on, eyes on a version of the service.

Speaker 1

And I

Speaker 7

guess, there should be like much lower Costs lower feature kind of volumes of the service that could have a very large penetration on your on your installed base and more expensive one that would remain at a lower penetration level. So I'm just wondering if you're taking that. And last but not least, like the simplest version of FSR available and are going to work from a technical perspective probably before like the ultimate robotaxi Vershin can work, if ever. And so I'm wondering how you take that into account in how you're thinking like the financial contribution of FASD over time And whether you could evolve your pricing along that kind of tiers to increase adoption. Yes.

Speaker 7

I mean,

Speaker 1

Fully autonomous vehicle, I think, Pierre, you sort of the economics of a fully autonomous vehicle are truly astounding in a positive way. When you look at passenger vehicles today, they only get about 10 to 12 hours of usage per week. That's If you drive an hour and a half a day on average, that's roughly 10 hours a week out of 168 hours. And then there's also you've got to have parking and insurance. You've got to take care of the car.

Speaker 1

It's like there's a lot of On overhead.

Speaker 5

So

Speaker 1

I mean, yes, It's like the economics of the system are just insanely positive Given that the car, like all of the cars we're making and have made for a while, we believe are capable of full autonomy. So then if you're able to say increase the utility of that car by And a factor of 5, which slowly means that you're being used for maybe 50 hours a week out of 168. So I just noticed you're still assuming that still assumes less than onethree of the hours of the week are is doing something useful. You've increased the value of that by 5, but it still costs the same. If you have something, then we're a hardware company with software margins.

Operator

Pierre, do you have a follow-up?

Speaker 7

Yes. I have a clear follow-up on a different topic for you, Vaibhav, if that's okay. It's about like your gross margin in the quarter. Could you give us a sense of Like in how the gross margin evolved sequentially, how much was the impact of idle costs, How much was like the sequential benefit, I imagine, of production ramping at Berlin and Austin? And then I saw like this massive jump in energy storage, Very strong positive surprise.

Speaker 7

So if you can give us the background on that and tell us how we should think about that gross margin going forward.

Speaker 2

Thanks for that question. So in terms of, you have a few different aspects of your question. So if I just look at from Q3 perspective, obviously factory idle time had an impact. It did impact by I mean, I won't give you the exact percentage, but it had decent impact for the quarter. And when you look at other pieces which we're trying to do, We did see certain of our other factories ramping up pretty well, right?

Speaker 2

And they actually contributed pretty well to the Margin for this quarter, in fact, one of the factories came pretty close to in terms of per unit costs To where we are for one of our other established factories, which is Fremont. So that was a positive in the quarter. When it comes to energy margins, Megapack Deployment was the key driver there. And that product has done well. On the cost curve also, we've been able to do a lot there.

Speaker 2

I do want to caution that Megapack deployments are a bit lumpy. So Yes, we had a great quarter this period. But depending upon where we are trying to deploy that product in different markets, You would see periods where there would be downward pressure on deployment because of us trying to get the product

Speaker 3

Product in transit, yes.

Operator

Okay. Thank you very much. Let's go to Rod Lache from Wolfe Research. Rod, feel free to unmute yourself.

Speaker 8

Thanks. Really nice to see the rate of Vehicle cost improvement despite the downtime that you took. You've taken now about $2,000 out of the Average vehicle costs over the past year. Can you give us maybe a sense of the rate of improvement that you see From the changes that you alluded to, the factory changes you alluded to, is there a way maybe to convey the Speed of improvement on your existing product from here. And then related to that, can you share the timing of your next gen, the lower Price product that you talked about earlier this year.

Speaker 2

Yes. So just in terms of product margins, there are lots of puts and takes When you look at this, there are certain things which we control and there are certain things which we don't control. We get we expect that we'll get some benefits from our cost reduction efforts, which are all underway. On the other hand, we just finished our factory upgrades late in Q3. Some of these factors are still in the early ramp phase In Q4, we're still not up to where we want those factors to be.

Speaker 2

So they'll impact in the near term. Plus, like Elon mentioned we're going to be ramping CyberTrack, which is going to be another headwind, which we will be dealing with. On top of all that, There's overall uncertainty in the macroeconomic environment, which even makes it harder to predict precisely as to where we land. Yes, this is something which it's an evolving thing, which we're observing every day and reacting to it on a daily basis.

Speaker 3

I would just say that on the cost reduction efforts, like we are not we are unflagging in our pursuit of Additional cost downs for 2024, we do have a good pipeline of them and work on both the engineering side and the factory operation side. And our intention is to maintain or exceed the trend that you saw. We're trying as hard as we possibly can.

Speaker 8

The timing of the next gen product, can you share that?

Speaker 1

Not at this time.

Speaker 8

Okay. And just as a follow-up, obviously, price is also a driver of demand, but that's obviously not happening in a vacuum. And you mentioned that, I think you mentioned that at some point during this call that you're also maybe hitting the law of large numbers on some of your products. Can you just share how you're thinking about price elasticity just at this point in this macro environment? And any thoughts along those lines?

Speaker 1

I think that there's very significant price elasticity. I mean, to be totally frank, if that car costs the same as a RAV4, nobody would buy a RAV4 Well, at least they're very unlikely to. It's worth noting that a lot of these Like the tax credit and whatnot, but they're actually very difficult for the average person to access because they Most people do not have $10, you know, or even $7,500 burning a hole in their bank account. A large number of people are living paycheck to paycheck and with a lot of debt. They've got credit card debt, mortgage debt.

Speaker 1

So Yes. That's reality for most people. It's sort of a circle for people who are High income earners, and I'd say high, it'd be like someone who's earning over $200,000 a year to understand what life is like for someone who is earning $50,000 or $60,000 or $70,000 a year, which is most people. So, for a lot of people, these tax credits just they can't front $7,500 for 18 months or even 6 months to get for the tax credit. And they actually don't, in some cases, even have that And I'm sorry, dollars 500 in taxes.

Speaker 1

So it's really just the vast regard to people is how much money do they have to pay immediately and how much per month. That's it. Thank you, stop right there. And our car is still much more expensive than a RAV4 when you look at it that way.

Speaker 2

Yes. One other thing which I'll add, when you look at car buying in general, We're trying to get to the next set of EV adapters.

Speaker 1

Well, not even not an EV adapter, just who wants a great car. Exactly. It's not a You know, so now you get these like, you know, honestly, I would say it's like somewhat correlates with the why doesn't everyone work from home crowd. I'm like, I mean, this is like some real Marie Antoinette vibes from people who say, why does everyone work from home? Like, what about all the people that have to come to the factory and fill up the cars?

Speaker 1

What about all the people that have to go to the restaurant and make your food And deliver your food. It's like, what are you talking about? I mean, how detached from reality Does a work from home crowd have to be? While they take advantage of all those who do, who cannot work from home. So I mean, you have to say, like, why did I sleep in the factory so many times?

Speaker 1

Because it mattered. So I just can't emphasize how important cost is. It's not an optional thing for most people. It is a necessary thing. We have to make our cars more affordable So people can buy it.

Speaker 1

And I keep harping on this interest thing, but I mean, it's just raises the cost of the car. We're looking at an internal analysis, which we think is more or less on track That when you look at the cost or the price reductions we've made in, say, the Model Y, And you compare that to how much people's monthly payment has risen due to interest rates. The price of the Model Y is almost unchanged.

Speaker 2

If you factor in the $10,000,000 interest rate.

Speaker 1

Yes, which is the thing that's what I'm trying to say. The thing that matters is the monthly pay. It's How much money do they have to put down? And do they literally have that in the bank account or will they check balance? And then what is the monthly payment?

Speaker 1

And it doesn't matter how if that monthly payment is Principal interest or whatever, it's just a number. And that number has to not cause their bank account to go negative. That's it. So going from near zero interest rates to the current very high interest rates, The actual monthly payment is basically the same. It's just a bunch more of it is going to interest.

Speaker 1

And there are some incremental challenges beyond that, which is the difficulty of getting credit at all has increased. And so Number of people who simply cannot get credit, period. Even if they've got a job and everything's solid, the banks are You know, a little gun shy on handing out credit, given that a bunch of them kicked the bucket earlier this year.

Speaker 3

Yes. There's also just fewer options. Even if they hand out credit, there's

Speaker 1

fewer banks to go there. Does your bank still exist? Yes. Well, If the bank does not exist, you have to establish a relationship with a new bank. And So a lot of regional banks are dying.

Speaker 1

And I mean, even Credit Suisse, I mean, jeez, that was a shocker. You know, got a like 160 year old ish Swiss institution that doesn't exist anymore. That's mind blowing. And I think there's still quite a few shoes to drop on the bad credit situation. Commercial real estate obviously is in terrible shape.

Speaker 1

Credit card debt has been rising significantly. The credit card interest rates are usurious, I mean, 20% interest rates, meaning like which over time is just becomes It's extremely punishing because if somebody's paying 20% interest on their credit cards, it means they cannot pay them off. And if you cannot pay them off and you're still accruing interest at 20%, That's headed to a bad place.

Operator

Thank you. Let's go to next question from George from Canaccord.

Speaker 9

Thank you for taking my question. Just to focus on the cost per vehicle Coming down in future quarters, as you discussed in your written remarks, I'm curious as to what the levers of that could be. Is it more scale, more factory utilization? Is it material cost reductions? Are there things like gigacasting?

Speaker 9

I mean, could you just kind of give us some Data points to give us confidence that that's going to come down over time. And if I can sneak one in, please, there are press reports, and I know how perilous it is to believe some of these. They say that you've included radar as an option in some Model Y's in China. And I'm just here to ask if that's true.

Speaker 1

We have radar as a Tesla designed radar as an experiment in Model S and X. That's it. We'll see whether that experiment is worth it. But there are no plans to Integrate radar into 3 and why. Just as humans drive well and in fact, an excellent human driver Contracted with amazing safety simply with their eyes.

Speaker 1

The car will far exceed The average human safety just with vision, far, far, far. Because I mean, the car is looking at all directions at once. We don't have eyes in the back of my head. So And the computer never gets tired and never gets distracted, get drunk, hopefully. And so radar is You know, it's not what really matters is how much does it affect the probability of an accident.

Speaker 1

And in order for the radar to be effective, You have to be able to do radar only braking you have to do actions that are radar only. Otherwise, you get this disambiguation problem between vision and radar. That's why we actually turned off the radar in cars historically that we had shipped. L3 and Y used to have radar, but we turned it off because the radar actually Generated more noise than signal. Now the Tesla designed radar is a high resolution radar that has Some potential to be useful, but the jury is still very much out on whether that is in fact the case.

Speaker 5

On the cost question, I guess from the vehicle side, like, as Drew mentioned earlier, we are always trying to engineer our products to be Cheaper to make and more efficient to make. That comes obviously on the engineering side as we come up with new innovations, but as well on the supply chain side with our partners, we work with them to automate some of their lines, remove their, you know, problem next and their high costs as well on the logistics side, getting parts of the factory. It's not it's not it's not like a one thing that you have to you have to attack cost everywhere. And We do it ruthlessly at

Speaker 1

all times. Operations, efficiency, all of the above.

Speaker 2

Yes. I mean, I would say there's a whole long list of things, Which we are chasing. We internally call it the cost attack, where we're literally going line by line and saying, how can we make it better? And it's a grind.

Speaker 1

It's a grind. It's a game of pennies. It's like Game of Thrones, but pennies. I mean, first approximation, if you've got a $40,000 car and roughly 10,000 items in that car, That means each thing on average costs $4 So in order to get the cost down, say by 10%, You have to get $0.40 out of each part on average. It is a game of pennies.

Speaker 1

We play it. We've done it many, many times. And Even something as simple as like a sticker. Like there's too many stickers Internally in the car that nobody ever sees. There's something as simple as a QR code.

Speaker 1

You might think, well, putting a QR code on part 1, I just put them Throw on there. It's like, well, are we actually going to use that QR

Speaker 5

code? Possibly pending.

Speaker 1

Yes, exactly. And then Notably, sometimes the QR code doesn't go on properly or you can't read it properly and then it stops the line.

Speaker 5

For more than a penny. Yeah, absolutely.

Speaker 1

Awesome. So it's chipping away with it. I mean, it is trying to it is it does feel like digging a tunnel with a spoon at times.

Speaker 5

Very much escaping prison. Yeah.

Speaker 2

On top of it, Like we said, we did some factory upgrades, so we expect volume to go up. That would also bring some savings from Hyreproduction. Then on the flip side, we're going to be ramping a new product like CyberTrack, which we talked about. So, yeah. So those are the real puts and takes, which we are working through.

Speaker 1

Yes. But there's not like some accidentally, you know, some gold brick of gold that we've flattened into the car, unfortunately. And it's We try to be very rigorous about improving the quality and capability of the car because that's like Any fool can reduce the cost of a car by making it worse, and just, you know, deleting functionality and capability. And That's how I call this sort of any tool. Like if you want to like lose weight and you say, well, I need to lose over £15 right away.

Speaker 1

Well, you could drop your arm off. But then you're sitting there with 1 arm. You're still fat. So it's sort of like, yeah, I don't work. Yeah.

Speaker 1

You actually have to He's eat less food and walk out. That's the actual way. And doctors and folks. Yes. Yeah.

Speaker 1

Super fun because food is delicious. And I personally am not a huge, but I don't love working at. I know some people do. I wish I did, but I don't. Unless moving the mouse consists of working out, in which case I love moving the mouse.

Operator

All right. Let's go to Colin Langham from Wells Fargo. Colin? Colin? Can you unmute yourself?

Speaker 10

Sorry about that. Do you hear me now?

Speaker 5

Yes.

Speaker 10

Great. Thanks for taking my questions. You said in the commentary that you're not going full tilt on the plan in Mexico and Until there's signs that the economy is strong, can you continue at a 50% CAGR without that plant And where would that come from? And any color on what you mean sort of not going full tilt? Could that plant get delayed indefinitely?

Speaker 10

Or what are you kind of talking about?

Speaker 1

No, we're definitely making the factory in Mexico. We feel very good about that. We put a lot of effort into Looking at different locations and we feel very good about that location. And we are going to build a factory there. And it's going to be great.

Speaker 1

The question is really just one of timing. And It's going to be a broken record on the interest front. It's just interest rates have to come down. Like if interest rates keep rising, You just fundamentally reduce affordability. It is just the same as right increasing the price of the car.

Speaker 1

So I just don't have visibility into it. If you tell me what the interest rates are, I can tell you when we should pull the factory. We're going to pull it. And I think we'll start the initial phases of construction next year. But, I am still somewhat scarred by 2,009 when If general voters in Chrysler went bankrupt.

Speaker 1

So, well, that's now 14 years ago. It's That has seared into my mind with a branding iron, because Tesla was Just hanging on by a thread during that entire time and with them, I mean, and we close off Financing round 2,008 at 6 p. M. December 24th, Christmas Eve. And if we had not closed that financing round, We would have bounced payroll 2 days after Christmas.

Speaker 1

So we actually closed that around on the last hour of the last day that it was possible. Stressful, to say the least, and then barely made it through 2,009. So I'm like, I want to just I don't want to be going at top speed into uncertainty. A lot of wars going on in the world, obviously, as well. So, and we have

Speaker 5

room here, like in Giga, Texas. You said we still have room in this building. It's not full with Cybertruck and Hawaii. And No, there's plenty of growth opportunities still

Speaker 1

to have inside the building where our team already is. We also have 2,000 acres here. There's also a one time. We're actually only occupying Tiny quarter of the planet that we have. But we could technically do all the scaling That's right.

Speaker 1

Just here. So, I mean, personnel is our biggest challenge And that the Greater Austin area only has generously, the Greater Austin area only has 2,000,000 people. So people are moving here and they're willing to move here, but there is Somewhat of a housing crisis. They got to live somewhere. So I don't know.

Speaker 1

I mean, I'm just curious, like I just, I'm not saying things will be bad. I'm just saying they might be. And I think, Tesla is an incredibly capable ship, But if we need to make sure like as if the macroeconomic conditions are stormy, Even if the best ship is still going to have tough times, the weaker ships will sink. We're not going to sink, but Even a great ship in a storm has challenges. Now that storm will apply to everyone, not just us.

Speaker 1

And not just the auto industry, but everyone, I think. So, you know, apart from Necessary sort of staples like food and stuff. But So I just, I don't know. If interest rates start coming down, we will accelerate. Very good.

Speaker 1

Very good. Good. Got Any guesses on this? I'd love to be less wrong. And I apologize if I'm perhaps more paranoid than I should be.

Speaker 1

That might also be the case because I have PTSD from 2,009, big time. And in 2017 through 2019 were not picnic either. That was very tough going. So, the auto industry is also somewhat cyclic because people Can't hesitate to buy a new car, if there's uncertainty in the economy. So it's part of companies do very well in good economic times, and they don't do as well in In top economic terms.

Speaker 1

So it's just whereas if somebody is selling bread, then I think, you know, people still need to have bread. Yeah. You need bread. We're 3 d for all time. But if you are, you don't have to have bread Smith.

Speaker 2

Especially if there are wars going on and then that impacts your sentiment.

Speaker 1

Yes. I mean, people are reading about Wars all over the world. If this, playing in your car tends to not be front of mind.

Operator

All right. Unfortunately, that's all the time we have today. Thank you very much for all of your good questions, and we'll see you again in 3 months. Thank you very much.

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Earnings Conference Call
Tesla Q3 2023
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